(A sense of humour can overcome all unpleasant situations in life. )


The government and RBI have locked horns over something that BELONGS to the government. The government is watching helplessly as the RBI is laying down rules for running of the PSU Banks. You may say that private banks are also bound by these rules. But, the government of India cannot be treated like anyone else.

The government has always done what it wanted, with the PSU Banks. Right from seizing ownership from private hands, to hiring excess people, giving loans to whom they want, writing off loans at will, not being subjected to ‘true and fair’ accounting, appointing small time auditors with no resources to sign on the dotted line, etc are but some of the privileges that the GOI has enjoyed.  And here comes the RBI (whose key appointees are in office at the will and pleasure of the GOI). How dare the RBI tell the PSU Banks that it needs to be disciplined like some wayward child? Parental Controls Administration (PCA) ? Hey RBI, you are talking to your boss and benefactor. Do you not understand that PSU Banks can lend till the cows come home, to friends and family of the rulers and can also write off the loans when they choose? It is no business of yours.

You are spiking the growth prospects of cousins and nephews who are in the contracting, sorry, infrastructure business that contributes 3% to the GDP. What if they do not have a sound balance sheet.? The PSU Banks have never bothered with all this. One phone call from Delhi is all that it takes to disburse the depositor money that needs to be paid interest on a timely basis.  When the depositors of PSU Banks do not bother with this, why are you worried? Have the PSU Banks ever defaulted in repaying deposits? The government always finds money to shore up the capital base.

Coming to “Capital”, why do you equate private banks with PSU Banks? PSU Bank promoter has a deep pocket and can mint money at will. Ok, the RBI owns the printing press, but the schedule for the press will be carved out from the budget of the Government. I have a suggestion. Get the PSU Banks out of Basel compliance. It is not necessary for any compliance so long as they are just going to accept deposits and give it away as loans. Should the loan not come back, in any case the owner will make good the shortfall. That is the faith on which we all put money in to PSU Banks. Why strain the government with this strange thing called “capital”? Well, they may not be able to issue global L/Cs or guarantees, but then, how many exporters are there? And maybe the Government can keep ONE PSU Bank like SBI as “Basel” compliant and route all global risk transactions through that.

And now the RBI is simply hoarding reserves that  were built up over the past. Since 2014 they have anyway been surrendering ALL the profits to the owner. It is just some partial claw-back of what in reality belongs to the Government. How can the RBI fight over it?

And coming to the printing. Well, the RBI prints note based on the budget numbers. And what will it do with simply deciding what denominations to print etc when it could not even count a few bundles of currency notes? Let the printing press be managed by the Government. Maybe the CAG office can take over the mint. They are used to dealing in large numbers ever since the 2G scam.

Thus, all the differences can be peacefully resolved. There is no need for so much brouhaha over it. And there is simply no need to set up any committees. If it comprises of only RBI people, there will be fingers pointed. And a committee cannot be only outsiders. And if it is a composite one, there will be fights. Simply avoid the committees. The solutions I have given are simple to execute. The owner will be happy. And the RBI can go back to preparing long policy statements, talk of hawks and doves, trade balances and other things that are traditionally used to embellish the talks that the governors and his deputies give from time to time.

And coming to Board Meetings.. Simply do away with them. RBI is not a company under the Companies Act that it has to comply with any governance. It is a proprietary concern of the Government of India. Just transfer the balances to the owner as and when he wants. After all, it is his money. Just sign the circulars when they are given for signature.

If the RBI does all that I say, it will actually free them and they can actually get down to regulating non banks, chit funds and other entities that are generally caught after the scam is over and done with and focus on the wrongs in the private banks. Extending terms of 65 year olds for some, denying extensions for others, following up on the Long Form Audit Report etc are tasks that demand a lot of time and focus. And they can actually go around and stop frauds as they are happening rather than leave it to CBI or others after many years.

R Balakrishnan

PS : Laughter is a good medicine and works most of the time. The Board at the RBI has so many ‘independent’ directors that were used to simply attending meetings, now are in the eye of a storm. They must thank the media for sparing them air time. On a serious note, the fight is far from over. The RBI will have to subservient to the legislators.



Life Insurance-Know What you are SOLD..

(This appears in today’s edition/s of Deccan Chronicle).


Life Insurance.  A very vexatious topic. I hear of agents who are part of the “Million Dollar Round Table”. They get paid holidays and vacations at exotic locations. I have nothing against them. They are selling you a package of fear at a price that you will not understand or know.

Life Insurance in its purest form is where you pay an annual premium and should you die when your policy is valid, your nominee/s get the insured sum. It is to provide your dependents with financial security. In other words, your death makes a ‘financial’ impact on them. And the important thing to understand is that should you live through the policy period, you do not get anything back. The premiums are not large. And the important thing is that the coverage amount should be substantial enough to provide the dependents with financial security for some period of time.

I see advertisements offering ‘term’ plans at Rs.563 per month for a ONE CRORE RUPEES coverage. The sums vary from company to company. It is important to note that NO agent will generally show you this “Term Plan” product.

The insurance agent will try to tell you that you should buy a policy where you get your premium back. It is a big psychological lure. The agent does not tell you a lie, but he hides a lot.  These policies go by different names. “Money Back” policies, endowment policies or Child plans etc.. Now, in all these policies, if you try to buy something for the above amount of Rs.563/- per month, for, say, 25 years, you may at best get a cover of around Rs. 2 lakh for your life. The agent will tell you that you get back Rs.2 lakh plus some ‘bonus’ at the end of 25 years.

In effect, you are buying a Term Plan for Rs.2 lakh. The insurance company uses the money to invest and give your returns AFTER meeting the sales expenses and the administrative costs. The scale of commissions on a Term Policy typically ranges between five percent to two and a half percent of the ANNUAL premiums paid. And since there is nothing to be invested or returned, it does not matter to us what is the level of expenses that the insurance company incurs in ‘administering’ the policy. We simply trust that should there be a death, the full amount is paid without any deduction, to the nominee/s.

However, when we buy any other plan where there is a financial return to the policy holder during the life of the policy, the way it works is that a small sum is recovered for the ‘life cover’. Then there are ‘administrative’ charges that can range from one to two and a half percent per annum. Then come the killer charges. There are sales commissions to the agents. The commissions can be as high as twenty five percent of the first year premium and gradually tapering down to five or two and a half percent per annum, depending on the structure. Of course. Naturally, the returns will be only on what is invested after meeting all these costs.

Now, if we were to take a ‘pure’ term policy for a crore of rupees, we just spend Rs.563 (an illustrative amount from one policy quote on the net) and treat it as an expense. If we were to get the same cover from an investment type policy, the monthly premium on a 25 year policy could be as high as Rs. 30,000 per month. If you were to buy a term policy and invest the balance in a mutual fund, you would get a higher return.

We could analyse any investment linked insurance product and establish that it is financially more sensible to invest in a pure term plan and a mutual fund combination.

Investment and insurance are two separate financial outlays. Do not mix up both.

Some suggestions when you take a Term Plan:

  • Buy a policy ONLY if you need it. If you are wealthy enough that your dependents do not need money should you die, it is pointless. Statistically, most people survive the insurance period;
  • You may start off with buying insurance. At some stage, you will become financially secure and have provided for your dependents. Now you simply stop paying premiums;
  • Check “on-line” rates. They are far lower than going through an agent. You could walk in to an insurance company and some employee will assist you; and
  • MOST important factor is to start early in life to lock in to lowest possible annual premiums and to have cover for a reasonably large sum upwards of a crore of rupees.

There are also some unique insurance products that can be useful as an old age help. I will discuss that in another piece.



R Balakrishnan

A mail received in response to the above article from a reader:

Dear Sir,

I just read through your article in today’s DECCAN CHRONICLE. While I have been a regular reader of your column, this one connects more, because I am an active agent myself. I first took up general insurance and was later drawn to the life sector, eyeing the attractive commissions, as it were. Moving along, I did some soul searching and realized, much to dismay, that the poor client was the “Id Bakhra”; flesh, skin, bones and all. I began promoting pure term policies, but with generally poor response, since there wasn’t promise of any pot of gold at the end. I was, at times, even accused of mis-selling!
I now concentrate on general insurance, which is rather well received and my conscience is easy.
Maybe you could pen down an article on the benefits of general insurance, to help for a better understanding.
Good day Sir.




(I wrote this for a magazine named “Industrial Economist” . The government unfortunately is set on a path that will throw a lot of good money away)

IL&FS- A Regulatory failure and cover up?

The IL&FS affair is not the first of the scams we have seen. There have been many in the private sector and if I may say, the universe of the PSU Banks has been a haven for scams. As is the case, it is corruption and greed. In case of IL&FS, it had pedigree promoters to start with and a maverick CEO who then changed shareholders and ensured that there was a thick veil between him and the outside world. The shareholders and their directors are guilty of negligence in letting an unfettered rein to the CEO.

As the sordid saga unfolds, it is very disturbing to see a ‘rescue’ plan being put in place by the government that seems to have panicked. The RBI had labelled IL&FS as a ‘systemically’ important NBFC but then its supervision has been a total failure. A team with a bunch of people with zero experience or expertise in infrastructure were allowed to survive unquestioned for three decades and borrow a lakh of crore of rupees! And we have a fiduciary agency like LIC buying equity in an unlisted entity and then stepping in to rescue, throwing good money after bad. Everywhere it has been a failure of responsibilities.

And the blame is being pinned on the rating agencies! It is like blaming the film critic for a review that does not match the film. While they are guilty, we are being foolish to hang the crime on them. The money managers have no business to base an investment decision SOLELY on the basis of some alphabets expressed by a rating agency. If anyone is to be punished, it should be the investment managers who bought debt in this company without doing their homework. Of course, I would also like to impose a huge monetary penalty on the rating agencies for their negligence. The only excuse for such a sharp drop in ratings would have been a structured fraud. Here, it is clearly a case of poor credit judgment and negligence in surveillance of a rating that has been assigned. Anyone with some basic sense should have put this kind of funding of long-term projects with short term debt in to a far lower rated category.

I am categorically against the ‘rescue’ of such an organization. It is not a PSU Bank where public deposits are at risk. This is not a socially relevant enterprise. Let it fail and go in to bankruptcy. Appoint an administrator who will have the twin tasks of closing down the shop and also investigate the frauds. Maybe the SFIO will do its job. The focus should be to sell it like any other Bhushan Steel. If IL&FS is worth of a rescue, so is every infrastructure company in the private structure that has gone under and so much of bank loans have been written off. A Kingfisher Airlines was more useful to the public.

The ‘rescue’ act by the government seems to be a cover-up to protect some people.

As per reports, the assets could realise 70K crores. The loans could be around 100K crores. A 30K hit will be distributed between banks and mutual funds etc. Why is there such a tearing hurry to ‘rescue’? Each of its running projects can be sold at a price. The projects yet to take off can be simply awarded or sold to another bidder. Surely, the hole in the balance sheets cannot be filled by any facetious ‘rescue’. Look at the rescue act. A board with no experience or expertise in infrastructure has been put in place in a hurry. Now probably they will choose a CEO who is an ‘establishment’ man. And then LIC will step in and maybe some shareholders will contribute some more capital and loans rescheduled. However, this will be done by someone or people for whom the outcome may not be so important or relevant. And banks will be forced to restructure debt and we will pretend as if nothing has happened.

The company has a poor culture that should not be allowed to continue. Creating a maze of companies and putting low level employees on the board, building a network of connects and write less than profitable business, graft in many areas etc are not things that need ‘rescue’. The government has panicked. There is no comparison to Satyam. Satyam had no debt. It had a good business. Here, there is a mountain of debt and not sure whether the business it has is viable. Every past business, whether it be the NOIDA toll bridge or the Tirupur project of IL&FS, it has been shrouded in mystery and cost escalations that were several times the estimates. Let IL&FS die a corporate death. Do not let the wound fester.

R Balakrishnan

October 5, 2018

Finance Stocks- A door slams shut, but a window opening…

(This appears in today’s edition/s of Deccan Chronicle.  The finance companies- whether NBFC or HFC sector- became expensive- then ILFS attack happened. Now fear- An opportunity … Be selective, slow and patient…

http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11756598 )

The Financial Sector- An opportunity

The finance sector stocks are in turmoil. Wave after wave of negative news-flow that takes prices lower and lower. Credibility of companies being questioned. People saying this is a good time to buy. Some saying “I told you so”.

It is good to see this sector getting some attention.  The investment thesis in this sector is driven by an assumption that all growth is driven by money and hence the providers of money are natural winners. The seemingly endless growth rate justifies exaggerated valuations. All valuations are defended.  A high valuation of one stock is used to justify higher valuation for their poorer cousins.

The core business is money lending. Prudent lending is backed by solid income streams and sometimes hard assets. Hard assets that can be realized for value to settle loans when the income does not flow as anticipated. Thus, the analyses of cash flow or income is the most important thing for a money lender.

“Collateral” or “Security” is often just a word.  Any asset that has value in a public and easy sale is probably the only real ‘security’.  A machine that is worth a crore may be worth just its scrap value in liquidation. A piece of land is based on valuation. Unless you know the land and the market, the security is useless. A bank putting a number to acres of some industrial estate is probably just filling in the columns.

The money lender of the text book uses his core capital to lend. He does not borrow in turn and lend. He does not seek growth beyond what he has. However, the limited company structure, the lure of stock valuations make the NBFCs to borrow money and lend. They want to use as much of this ‘leverage’ as possible. Their small equity based can then enjoy the profits made on the borrowed money plus the returns on own money.  This is the universal model.

One important assumption in ‘keeping well’ for these businesses is that repayments will be on schedule and borrowing pipelines do not get choked. They are emboldened to borrow near term money and keep rolling it over. Commercial Paper is one such tool. Unfortunately, the buyers of Commercial Paper are mutual funds and insurance companies. Even Banks invest short term money in Mutual Funds which invest in Commercial Paper. Thus, bank credit flows to these NBFCs through a ‘makeover’ facilitated by the mutual funds. And while the bank may charge the NBFC a rate of, say, 12% for direct lending, the CP route may fetch money for the NBFC at a rate of 8% or so!. And the Bank that invests in mutual funds may get a return of six to seven percent on its investments.

The Bank money in Mutual funds works to lower the rate of interest available to the bank on its investible monies. As the money supply grows, other investment pools come in the NBFC business seeking fixed returns. A whole eco-system is created which results in NBFCs getting more money than can be handled prudently. All this is heading towards exotic lending like automated lending, lending driven by “Artificial Intelligence”. As lenders find more and more easy money, the time spent on risk management comes down. The market wants rapid growth. Quarter on quarter. Year on year. And one day, one or both of the things happen- The borrowers do not repay in time or some loans go bad. Many times, the cost of chasing a loan recovery is large. When automated systems drive instant loans, recoveries are zero. The lender backs on probability of default and prices it in. Alas, human behaviour is never a smooth predictable curve. Surprises are always round the corner.

Similarly, a crisis of confidence like the present one has resulted in the choking up of money flow in to the lenders. This means their growth plans get hit. And it also has a negative impact on ‘roll-over’ loans, where the health of the loan was kept in the green by new loans to replace the old. Maybe the finance companies will not take a big hit to their bodies, but surely, the growth numbers, the cost of money and the ROEs are slated to come down. They will come down till the next round of crazy money comes their way.

This is a cycle. The financial sector will go from fear to greed and back. There is no need for any advance warning. I do not have any clear financial indicator that will give us or tell us about turning points. As investors in this sector, it is best to stick to established names. They may not give you exponential returns. When the sector falls out of favour, everyone will fall. The good may fall less than the bad, but fall they will. Use this opportunity to build up a High Quality portfolio in the finance sector.  Look for stocks of companies where promoter reputation is good, history of doing well over ten years plus and strong management teams are in place. In finance business, history and trust are important attributes. It is not difficult to establish these factors. I must caution that I am NOT calling a bottom on this sector yet.

R Balakrishnan



SEBI- Some suggestions ..

(This was the gist of a dialogue with SEBI at an event held by Chennai International Centre. I wrote this for a magazine named Industrial Economist)

SEBI-  Gaps in Oversight


At the outset, let me say that 1992 marked a turning point in our capital markets. For the better. The Securities & Exchange Board of India was set up to regulate the lawless capital markets, which were mostly governed by the stock brokers and we had nearly twenty regional self-regulated stock exchanges.  It is thanks to SEBI that there is now some order in the market and there is confidence in the systems.

However, there are some gaps, which SEBI needs to address. Expanding the market is not its primary role. The important things that SEBI has to do is in the areas of ‘disclosure’ and ‘enforcement’ of the letter of the law in the capital markets.

In the battle between the companies and the regulators, the regulator has lost. Since SEBI came in, I am seeing disclosure of company accounts getting LESSER rather than more. While the text part where companies talk about themselves have gone up and schedules are added about steps taken to bring gender equivalent, schedules that used to show production, sales of different things the companies made, have gone missing. Now we have ‘consolidation’ of accounts (a summary of the company plus ALL the subsidiaries and associates) as a rule, but detailed accounts of the subsidiaries and associates have gone missing. Even the web sites of the companies do not carry it. Some do, but it is not a legal compulsion yet. Thus, financial disclosures have become opaque. The balance sheets have become high on pages and low on content.

Similarly, take the case of “IPO”s.  There are ‘offer documents’ that run in to a few hundred pages. However, no investor sees this as these are only uploaded online. There is a ‘statutory’ advertisement in the newspapers which give so many details. However, the details miss out on simple and very important things-  What does the company do to make money? What is its business? How long has it been around? What is the valuation of the company going to be after the issue is over? What were the sales and profits numbers in the last couple of years? Who are the individuals behind the holding companies that are shown as ‘promoters’?

The regulator has focused so much on details, but missed out the obvious ones. This makes me wonder as to who does the regulator work for? Is it for the companies? I clearly see that the investor has more hurdles to face when it comes to relevant information.

Similarly, SEBI is over active when it comes to things like ‘independent’ directors, ‘women’ directors etc.. However, these are good sounding things rather than being actually useful. Firstly, no promoter will ever appoint anyone who is not known to him/her on the board. And unless one is a full time director, the person’s knowledge would be limited to what he or she is told by the CEO/promoter. And if for instance a company pays an ‘independent’ director, who is a professional, a crore of rupees plus five star perquisites, is the person ‘independent’? Governance is something that law cannot bring about. Transparency is limited by the intent of the promoters.

SEBI can help governance by a deterrent punishment system rather than ask someone to follow a set of rules that are riddled with ‘escape’ clauses or loopholes. It is unfortunate that the legal help of SEBI when it comes to prosecution. They are unable to pay for the best available legal counsel. And the private sector legal counsels do not seem interested because of fear of losing commercial business. So we see less than ideal prosecution, lot of overturning of decisions by the SAT (Securities Appellate Tribunal) which can be demoralizing. Will SEBI get smart talent by paying market related fees?

When it comes to regulating orderly market where price discovery is free, there are obstacles. Instead of narrowing the options (like limiting the number of stocks in the F&O to a handful) the regulator has thrown open the door for a free-for-all. Of the 2000 listed companies, not even 200 are ‘liquid’ in terms of tradability at low impact cost. The exchanges want volumes. SEBI should be blind to that and enforce what is good rather than focus on expanding the market.

Today, our markets have come a long way. We are able to attract marquee investors to our trading floors. This has been possible only to the framework created by SEBI. I wish some of the gaps in disclosure and enforcement are also filled up. Otherwise, SEBI will be like the cops in the Indian movies. Showing up after the story is over.



R Balakrishnan

(Investment Analyst)




This is sent to me by a very dear friend who knows Bandhan Bank promoters and the company very well. His mail is self explanatory. Realise that the honest promoters have problems that the Regulators create. Long live the promoters of Bandhan

Someone referred your tweet on this to me…..and since I know them thought I should list the facts and seek your help in clearing the air at least to your followers ☺️
This is foot in the mouth nonsense….most don’t even know what the issues are….
1) As per SEBI promoter holding is locked in for a year after the IPO ……so they can’t sell without violating that rule. This was known to RBI and they permitted the listing because they knew the below facts and understood that Mr.Ghosh is a miniscule shareholder and that the holding was actual spread out but tangled.
If you ask me RBI did the “right” thing but now has been pushed into a corner by the media who are obfuscating the issues.
 Bandhan had to came with the IPO to meet RBI licensing conditions to list within 3 years. Bandhan did not need that capital. It was at 32% CAR and hugely profitable and still went thru that IPO trouble.
2) Bandhan Financial Holdings …shown as promoter…..holds 82% of Bandhan Bank
But who holds Bandhan Financial Holdings (BFH)
It’s 100% owned by Bandhan Financial Services
But who owns this Bandhan Financial Services
40% with 2 Trusts and rest 60% by SIDBI, GIC, and other such institutional investors.
So at the end of all this holding companies are these Investors holding 40%  and 2 Trusts who hold 40% . The Trust’s are the actual founders and so the true promoters.(How they ended up with that 40% is a separate story)
Problem is all  the above  are holding Bandhan Bank shares indirectly thru that Holding company which holds 82% in that Bank. So it is an optical illusion that promoter i.e BFH is holding 82%….. actually underneath it is diversified.
Simple route to untangle is merge holding company with Bank and handover Bandhan Bank shares to them in exchange of their holding in BFH. The promoter trusts will end up with 40%. Viola norms met !!
RBI is sitting on this merger request well before the IPO etc. They understand that holding is diversified and therefore permitted the IPO lock in stuff.
3)Why are these Trusts and institutional investor holding shares indirectly through BFH? This is because BFH was the vehicle for bidding for the bank license and had to show that 500 Crs capital. So SIDBI …GIC etc bought into the Holding company.
4) Another likely route for untangling  would be for BFH ( i.e the  Holding Company) to sell its 82% stake in the Bank  to its investors (that Sidbi, GIC etc) and with that money buys out their equity in the Holding Company and liquidate i.e Bandhan Financial Holding
Net net nothing of that 82% will come to the market. Also explain this to the people at Moneylife. They are being mislead.
The damage by RBI’s denial is to a just cause and not to Mr.Ghosh who owns a piddly stake (2% I think) …..and this too thru some employees welfare trust I think.
5)How did the 2 Trusts i.e Financial Inclusion Trust (32%) and Northeast Trust (8%) end up as promoter of the bank with 40% holding ? And who is the beneficiary of these Trusts?
Beneficiary as per the deed are the hardcore poor. Trustees are reputed people. They do the CSR for Indigo, Tata, HDFC Group etc
These Trusts ended up with the holding due to business transfer from “Society” to a Finance company. Bandhan began life as a “Society” so when they achieved some scale and needed more capital they transformed into an NBFC.
Question was who will own the NBFC and where will it get capital to buy the business of the “Society”….that was where the Trust were created to house the ownership. The actual details are complicated but enough to say holding did not end up with Mr.Ghosh the founder !!
The only person who understands all that is Tamal Bandhoypadhya. I expect he will write.
So more power to your tweets and health !!!


IL&FS- It’s broken-Needs a Fix

ILFS is bust. It may have some ‘infrastructure assets’ that include roads, right to collect tolls on them, ports, SEZ etc. It has shareholders who include foreign names like ORIX of Japan or Abu Dhabi Investment Authority and Indian names like HDFC, LIC of India, SBI,  Central Bank etc. Any of these shareholders can take control, if they think there is potential to salvage. The process of bankruptcy is painful, since there are lot of assets that have a long life and revenue flows that have been pledged to raise money. IL&FS is not small in size either.

The problems must have come about due to one or more of the following reasons:

  1. Inflated or gold-plated project costs which resulted in high borrowings that cannot be serviced by the loans;
  2. Borrowings profiles are weak. Funding a thirty year revenue stream with a five or ten year loan leaving the company with no money to repay;
  3. 3Lower revenue streams than were anticipated on the various projects;
  4. 4.Poor capital allocation of leveraged money that have gone in to the black hole;


It is indeed amazing to see that the company was permitted to issue Commercial Paper! With lumpy revenues and huge long term borrowings to service, this kind of borrowing is built on a presumption that the CP programme will eternally keep getting re-fueled.

The role of the Rating Agencies is truly questionable. The nature of business itself ensured that a CP programme cannot get any investment grade rating. When there were nearly 200 entities and SPVs in place, it is impossible to assess a single entity and assign a rating. Either it was a structured fraud or sheer incompetence. While it is possible for ratings to collapse due to structured frauds, I have not come across many CP failures. In the Lehman boom period, we had property companies issuing CPs in India which defaulted and led to some panic in the MF industry.

The debt papers of this company has a range of investors from MFs to banks to NBFCs. It is certainly large enough to warrant some element of panic. There is a contagion effect which sweeps across the sector. Higher cost of borrowing, squeezing out of weaker players (which can cause further damage) and more tightening. Lower lending, lower personal loans and consequential slowdown. The non-bank sector is an integral part of our growth engine.

With all this in mind, one cannot afford to let IL&FS sink or drift without a resolution. It is clear that the GOI is thinking on these lines and hence the nudge to the LIC to pump in money. Will other shareholders (maybe SBI will toe the government line) pitch in? They might, if they see value in the business at SOME price. The price may be a very low one in the eyes of the other shareholders. So if an ORIX or even a new shareholders comes in with a chequebook, the terms are going to be opportunistic. Perhaps it is in this context that the GOI wants to protect the investments of LIC/SBI? Today, there is no time for due diligence. The need is to get in with money. In this context, I would not bother about control going to ‘foreign’ hands. None of the infrastructure projects can be taken away. They are all subject to supervision by domestic regulatory authorities. I do not think we should sit on ‘national’ pride. We are short of capital. If we can get the money, it is fine.

I raised my voice against LIC pitching in with policyholder money. First of all, this is an unlisted investment with no mechanism for price discovery. Secondly, it is not sure what kind of returns can accrue to the policyholder with this investment. It is true that of all the vehicles, LIC is the one with the biggest pool of money. However, it surely means that the policyholders’ money is being put to high risk. Not something a ‘prudent’ investment manager would do. Of course, each bet that LIC takes is a small part of their corpus and they also have problems in finding large enough tickets to buy in to.

There were reports that ORIX wanted to step in. I think the government should welcome ORIX.

If Orix has experience and expertise in Infrastructure projects, it makes sense. Being a company in the Infrastructure sector, the government always holds the controls, irrespective of nominal ownership. So we should not worry about ‘foreign’ ownership etc.

As a first step, the government can set up a war room with a new board. Remember Satyam? This is a similar case. There are businesses in the entity. It is only a question of value. Maybe a crack board of directors like the one that saved Satyam can happen there. And the government can pump in some initial money based on the cash flow needs. Someone has to put in immediate money to keep the show going. 

Time is of essence. Bad news in the financial sector is always contagious. On optimistic days, money is available to fund the wildest dreams. On days of pessimism, money refuses to see sunshine.


(This appears in today’s edition/s of Deccan Chronicle . (http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11589362 )

Given that the govt will not privatise PSU Banks, the least they can do is to contain the problem. Solving the NPA issue for now is a temporary solution. Time and politics will take its toll. In the meanwhile, some structural changes could be done.. My thoughts..)


Our PSU Banks are a source of unending misery. Looking at the structure and the assets of these banks, a few things strike me:

  1. All of them own a lot of real estate;
  2. All of them are bunched in many places, often, near each other;
  3. Branch wise profitability scores are distorted because market rate rents not factored in;
  4. Locally, same trader has multiple borrowings from neighbouring bank branches, without the banks ever bothering to contact each other about the outstandings. A trader simply operates under different names;
  5. Every bank needs capital;
  6. Skill sets are inadequate when compared to private sector banks;
  7. Decision making is knotted up in red tape;
  8. Government (promoter) interference in lending and hiring;
  9. No long-term game plan or business plan;
  10. Staff cannot be managed with the same flexibility as in a private sector, due to the unionization;


Each PSU entity is seen as a ‘fief’ which is handed over to the favourites of the politicians. A new beginning has been made with Bank of Baroda, where a private sector banker has been pushed in to the job. While he may want to make a lot of changes, his hands are still tied as he is burdened with the rules that limit hiring of new talent and removal of inefficient or unwanted headcount.


In this backdrop, two big events have happened. SBI has finally put an end to its subsidiaries and merged all in to itself.  This week, a merger of Vijaya Bank and Dena Bank in to Bank of Baroda has been announced.  While the SBI family merger did not involve serious culture clash, this merger will come with its unique set of problems. So many power centres in three banks will vanish. The affected are not going to be happy and frustration will set in.  While the CEO may like to do a lot of pruning, his hands would be tied. However, I see the outcome as a good one and more such mergers should happen. If the number of PSU Banks are reduced to two or three, then there would be a lot of gains. It may mean that a lot  of space would be left open for private banks to occupy. However, as a promoter, the government of India gains lots more by consolidating.  Some of the good things I can see are:


  1. Size of PSU Banks would go up;
  2. The on-going NPA clean up would leave the banks with good health;
  • A change in management and functioning styles can be easily managed;
  1. Lesser number of windows for corruption and ‘rent’ seeking;
  2. Combined with technology, room for frauds will be far fewer;
  3. Tremendous savings in infrastructure costs;
  • Easier to centralise the credit function- probably, the single biggest ‘need of the hour’; and
  • Finding resources for shoring up the capital base.


On the issue of raising capital, I have some thoughts.  Firstly, there would be a surfeit of real estate as branches would get chopped and rationalized. Wherever there are ‘owned’ premises, the sale of such premises would help realized money that will go straight to the Tier I capital. The government can do its bit by total exemption of capital gains for the PSU Banks for a window of a year or two.  The second way to raise resources is something that will call for arguments. Wherever the bank is occupying ‘owned’ premises, there is no ‘rent’ that is charged to the P&L and to this extent distorts the numbers by showing higher profitability than what is.  So, if a bundle of owned property is ‘sold and leased-back’ it would do two things- The sale proceeds would bring in cash to shore up capital. And the lease rent (the lease can be a back-ended one for thirty years or more) will reflect on the P&L account.  As to who will buy the asset, it can be a structured transaction with insurance companies, which need long maturity instruments. If there is a will it can be done. Alternatively, a mega “REIT” can be created, where all the PSU Bank properties are housed. This REIT can sell its units to investors who could be any one. It will also give a boost to the REIT markets with a globally comparable structure.


Thus, the mergers and consolidation in the PSU Banking space should be the order of the day. Competition will be sharper and focused. And the promoter has to think seriously about the management quality. The PSU Banks are one space where even the management cadre has a trade union! It is time to permanently fix this bleeding PSU Banks. It calls for a lot of political will.





(From an old Moneylife issue)
Understanding Credit Ratings

Credit rating is a much-misunderstood concept. It is also a much-abused concept. Normally, not many people care to know about rating. It’s only when ratings suddenly go wrong and there are defaults and downgrades, that there is a lot of outrage and the regulators and the public react sharply. The recent debacles of irresponsible investors have put the focus on credit rating. It is important that we understand the limitations of credit rating.
The first thing to understand is that ‘rating’ is an opinion. It expresses, in symbols, the likelihood of default in a specific debt instrument to which the rating applies. It is NOT a view on the company. For example, we may perceive Infosys/ITC/Tata Steel, etc, as ‘Triple A’ companies. This is where we make our first mistake. A credit rating applies only to a specific debt paper. It is possible that the same company may have two debt papers with separate ratings if the features are different. And a credit rating of a specific debt cannot be taken as a proxy for more lending. Often, our perceptions are clouded by the promoters, the share price performance and the fact that a company is debt-free, etc. A high credit rating is generally a good indicator of a good company, but it is not the sole guarantee. It is only a ‘confirmatory’ factor.
A credit rating agency uses several assumptions and these are all forward-looking views. Thus, there could be a change in the credit rating, should some events not materialise as expected. And industry dynamics keep changing. A rating agency will try to take a middle-of-the-road approach; it cannot take the most optimistic or the most pessimistic view.
We have to use credit rating as the first guide to preparing a shortlist for investing in debt instruments. Especially, if the investor is a ‘professional’ one—like a mutual fund or a pension fund. In today’s world, every investor does not know everything about every company. Credit rating merely helps a professional investor to prepare a shortlist and also to price the instrument. It is only the first step before an investor can take a final call to invest or not. The due diligence, in terms of homework, legal documentation and pricing, etc, is the work that the investor has to do. He cannot take the credit rating as the only requirement.
Research houses place ‘buy’ recommendations on equity shares. Do we ever hold them accountable or liable if the share price does not behave as expected? Credit rating is in the same category. Ultimately, the credibility of a rating agency is built over time. Agencies, like Moody’s and Standard & Poor’s, have been around for over a hundred years. If you take the total number of ratings assigned by them and take the number of errors, it would not be a large percentage. In the meanwhile, a few rating agencies came and went. It is still a duopoly in the developed world. Other agencies are ‘also-ran’ and carry less credibility than the big two.
In India, our approach to credit rating has been wrong. First of all, rating agencies are regulated by an agency that has no skills to regulate them. Secondly, we introduced the concept of ‘recognition’—that means that we let the door open to let in as many as possible. And we also let lenders control a rating agency (of course, with the so-called ‘Chinese walls’) and the result is not so good. Firstly, the lending agency ‘passes’ business to its subsidiary by coercion. And, when there are half a dozen ‘recognised’ rating agencies, there are bound to be one or two that will take the shortcut to get market share. ‘Shopping’ for ratings has become common now. And, in India, credibility is not as important as ‘managing’ the environment.
In the marketplace, most serious investors in debt do make a distinction between the rating agencies. They do not admit it publicly; but if you go through the history of rating disasters (I still maintain that if we look at the total history of credit rating in India, by and large, it has been a fantastic job).
The one disaster India has escaped has been the ‘exuberance’ of the rating agencies when it comes to ‘structured’ finance. The Lehman Brothers’ disaster was a defining moment in the history of credit rating. Liberal ratings, poor structures and the subsequent setback to the financial system, made the pre-2008 period in the US one of the worst periods in the history of credit rating. Rating agencies fought with each other to come out with more and more exotic structures on ‘demand’ by investment bankers who just wanted to collect fat fees for raising money and parking it with professional investors who used credit rating as the excuse, or justification, for their investment. It was a fraud on the financial system where everyone was guilty. And the prime focus was on the rating agencies, since they were the ‘holiest’ of the entire group of participants.
For retail investors, credit rating is of no practical use. The only place where they come in touch with rating is in the fixed deposit or retail bond markets. Here, I would urge people to remember that a rating agency is merely giving its opinion which can change anytime. It is based on assumptions of business, industry and probability of outcomes. The rating symbol is only a starting point. If you cannot do any analysis, it is better to put your money in a mutual fund that invests in debt instruments. Or if your amounts are small, then do not risk an extra percent or two; play safe and stick to bank deposits. We also have ourselves to blame. I know of people who lost money in fixed deposits. In most cases, the papers were either without a credit rating or a low rating. And there is also a pattern to the defaults in the local debt market. You have to make a distinction between the rating agencies. Personally, if there is a company where I have to depend on the credit rating alone, I will let that investment pass.
A credit rating, for a professional investor, is only a tool to shortlist or a starting point. He has to do his due diligence, analyse all the pros and cons and then take a decision. Often, in the institutional segment, the call to invest is taken by the fund manager at a very short notice. A credit decision is more complex than an equity investment decision. Investing in credit is actually taking a call on a company’s ability to pay interest and repay principal on the precise due dates. Analysis of the cash flow matters a lot. The legal system is complex. And, unlike equity, which can be sold at some price or the other, debt is either repaid in full or you get zero on the due date. Getting money after the due date may be OK for a banker, but not for a mutual fund or the individual investor. To sum up:
1. Credit rating is just an opinion, like a broker’s report on a share;
2. Investor has to do his due diligence before taking the call;
3. Rating agencies build reputations/trust on the basis of their track records;
4. Merely being a ‘recognised’ rating agency does not mean anything. Pedigree, process and reputation matter;
5. Credit ratings are specific to debt instruments. We cannot use them as a proxy for other papers or debt;
6. There is no such thing as a ‘company’ rating;
7. Depending solely on a credit rating for any investment or lending decision is irresponsible financial behaviour;
8. No amount of regulatory supervision will guarantee the integrity, or otherwise, of a credit rating agency. Reputation gets built over time.

Jack and the Beanstalk

Jack and the Beanstalk (New and Improved)

This was written by Neeraja, my daughter, many years ago.
Hope you enjoy it as much as I did and still do.

**New and Improved**JACK AND THE BEANSTALK
Once upon a time, not so long ago,
There lived Jack, his Ma, and their cow Mo.
Jack’s Ma, being a gambler, was prone to being broke,
And one such time when it happenned, she chanced upon this bloke
Who gave her the marvellous idea of selling her old cow.
She thought it a brilliant plan, and how.
She called Jack and told him sternly,
“You better sell our cow, and for good money”.
The next day Jack, his car, and his cow
Left the village for the market next town.
The next week Jack returned
And saw his mum playing solitaire cards upturned.
“Mum!”he cried “Are you alright?”
“The cards are turned the other side”.
She said,”Forget about me for now”
“How much did you get for our cow?”
He said ” I don’t think you could ever make,
A better deal than I just made”
He proudly held for Ma to see
A large bunch of green, weird leaves.
She cried “You dimwitted, useless clump,
What do I do with a weedy clump?”
“Mum, just light it up and take a puff,
One go at it ain’t enough”
She found out soon that he was right.
She would love to smoke it through the night.
The next day, the weeds, hard won,
Were planted by Ma at break of sun.
Soon, news spread about Jack’s magic weed
That gave you all the kick you need.
Its sales grew, and grew alright,
Jack became a millionaire almost overnight.
But the initial success of Jack and Ma
Hit a hurdle before going too far.
The police heard of”this marvellous high”
and the “weed which can kick you sky high”
They told Jack”I doubt it is legal
If it is, then I’m a sea-gull”
Jack, being quick of thought,
Realised profit lay beyond the law.
He gave the police a piece of his mind.
They left the town, left nothing behind.
They all made a quick, hasty dash,
Turned by the call of cold hard cash.
Thus goes the tale of Jack.
Of whom all that remains is his old shack,
In some place far far away,
Where his descendants live to retell the lay.